Quick Summary:
CFOs are going beyond their traditional number-crunching role and are now strategic players in a company’s ESG efforts. This means they are involved in environmental, social, and governance initiatives.
There are several reasons for this shift. Firstly, ESG factors can affect a company’s bottom line through regulation, reputation, and operations. Secondly, investors increasingly consider ESG metrics when making investment decisions.
Thirdly, sustainability efforts can lead to cost savings and improved efficiency. Finally, strong ESG practices can give a company a competitive edge. In short, CFOs are embracing sustainability as a way to manage risk, improve profitability, and create long-term value.
Traditionally viewed as the ‘numbers person’ at the top of an organization, the CFO role is evolving beyond traditional financial management to encompass a broader range of responsibilities. One of the ways this is happening is the increasing involvement of CFOs in company Environmental, Social, and Governance (ESG) activities and overall sustainability strategies.
According to accounting and business consultancy firm BDO’s 2024 ESG Risk & ROI Survey, more than half of the CFOs surveyed say they have embedded ESG principles into their core business strategy or are actively working on it, up from one-third in 2023.
CFOs are uniquely positioned to integrate ESG considerations into the strategic planning, capital allocation, and stakeholder communications of their respective organizations. As the importance of ESG and sustainability grows, CFOs are not only safeguarding their companies’ long-term financial performance but also helping to potentially create a competitive advantage in a rapidly changing market landscape.
As the article titled ‘Are CFOs really embedding ESG within their strategies?’ on CFO.io states in its sub-heading, “The CFO’s role has evolved from a passive observer to a strategic orchestrator. By embracing sustainability as a core driver of business success, finance leaders can unlock a wealth of opportunities.”
Here are four important reasons why CFOs are becoming increasingly involved in, and integral to, company ESG and sustainability activities:
Mitigating business risks
ESG factors are increasingly seen as critical to managing risks, including regulatory, reputational, and operational risks. On a compliance and regulatory level, governments and regulatory bodies worldwide are implementing more stringent ESG-related regulations by which organizations must abide.
From a reputational aspect, companies perceived as neglecting their ESG responsibilities may suffer from negative public perception, leading to reduced customer loyalty and sales. Conversely, positive ESG practices enhance a company’s brand image and reputation.
And on an operational level, disputes over supply chain labor practices and environmental risks such as extreme weather events can disrupt everyday business activities.
These risks aren’t going away – according to the BDO survey, “Sixty-one percent of CFOs anticipate ESG risks will increase or stay the same in 2024.”
All these risks can negatively impact a company’s bottom line and are thus factors which a CFO needs to be able to influence and control to properly perform their duty to their employer. Due to their seniority and their ability to allocate financial resources, they are well-placed to influence company strategy and mitigate these ESG-related risks.
Meeting investor and stakeholder expectations to unlock capital
With investors increasingly focusing on ESG metrics when making investment decisions and providing access to additional business capital and funding, CFOs need to ensure that their company meets these expectations to attract and retain investment.
By setting the tone right from the top, CFOs are essential in ensuring companywide accurate and comprehensive ESG reporting – which builds trust with investors and other stakeholders – as well as allocating the necessary company financial resources needed to meet stakeholder expectations.
As part of the C-suite, CFOs are also usually expected to communicate directly with external parties such as the board or partners and/or investors.
Being intimately acquainted with ESG and sustainability matters enables the CFO to confidently handle queries or requests directed towards them, and leaves a positive impression with stakeholders that their ESG-related concerns are receiving adequate attention from a strategic financial perspective.
Improving business efficiencies and reducing costs
Contrary to oft-held opinion, ESG and sustainability is not purely virtue-signalling; it has genuine potential to improve efficiencies and reduce costs within the business.
Incorporating green energy such as hydro and solar can reduce energy costs via initiatives such as power purchase agreements (PPAs) for example.
Retrofitting buildings with energy-efficient lighting, HVAC systems, and insulation, and implementing smart energy management systems can optimize energy use, and lower utility bills. Reducing packaging size and weight, using sustainable materials, and designing products for easier recycling can reduce material costs and waste.
These are just a few examples among many where a focus on including sustainability initiatives within business operations can have a tangible effect on cost reduction and improving business efficiency and profitability – very much the realm of the CFO’s responsibility.
Influencing competitive differentiation
Incorporating sustainability initiatives within business operations can significantly contribute to competitive differentiation and advantage in several ways, such as:
- Positive brand image
- Customer loyalty
- Efficiency and cost savings
- Access to new markets and customers
- Proactive compliance and reduced financial risks
- Talent attraction and retention
- Investment attraction and security
Each one of the factors outlined above has the potential to impact a business on a financial level, and when combined they can make a real difference to its overall profitability.
CFOs are becoming increasingly interested in leveraging sustainability initiatives to differentiate themselves from their competition and potentially generate better returns/profitability as a result.
Shift happens
It seems a shift is underway and a change in ESG-related priorities is emerging among CFOs.
To quote BDO’s 2024 ESG Risk & ROI Survey, “Whereas compliance topped last year’s ESG goals, it ranks eighth overall in this year’s survey. CFOs have not lost sight of ESG risks, but they show increasing appreciation for the ways in which sustainability initiatives can create business value and competitive advantage. The most frequently cited objectives for 2024 focus on potential upside of ESG initiatives — from improved brand reputation to talent recruitment and retention to capital access.”
With their unique positioning within organizations to exert a significant influence on strategic matters as well as control and direct the flow of money, perhaps it’s no surprise to discover that CFOs are no longer just focused on the narrow road of compliance but are looking beyond to see how they can mitigate risk, enhance long-term profitability, and create value through corporate sustainability initiatives.
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